Something’s in the marketplace I've never seen before - octogenarians flexing quads and biceps as if they just took an injection of monkey glands in Switzerland plus steroids in south Florida.
Starting with Warren Buffett and working across to George Soros and Carl Icahn, high intensity players are taking or adding to concentrated positions in controversial properties like Herbalife, Wells Fargo, Apple, even General Motors, my favorite industrial.
Not exactly Ovaltine investing. Nobody understands better than these operators that acting polite no longer works. When I look at the top 50 names in the S&P 500 Index the theme is inequality and spottiness, as many underperformers as outperformers.
To date, notable also-rans still embrace Apple, Wal-Mart, Chevron, IBM, AT&T, Coca-Cola, Oracle, Philip Morris International, Intel, Qualcomm and McDonald's. Outperformers include Google, Johnson & Johnson, Wells Fargo, JPMorgan Chase, Bank of America, Citigroup, Berkshire Hathaway, PepsiCo, Walt Disney, Home Depot and United Technology.
Themes and counter themes intermix. Energy, retailing, utilities and technology underperform. Financials, biotechnology, aerospace and mid-teens growers like Disney, Home Depot, Google and Gilead Sciences so far excel, but may be long in the tooth.
UnitedHealth Group, up 35%? I missed that one but made up for it with Gilead and Goldman Sachs.
Warren Buffett holds more than 40% of his invested stock market money in financials. If I positioned clients thus so, their advisors would push me out my office window. But banks worked. They remain classic room for improvement stories despite hefty adds to litigation reserves, billions upon billions.
How many times does Morgan get whipped over their Whale caper? The stock cringes every time they make the front pages of the press, which is daily. What economic significance is there indicting a couple of errant traders? Obviously, regulators are bent on tightening their tentacles around banks with another 500 pages of do's and don'ts.
In the financial sector I have moved out to small cap names like Radian Group and MGIC. Both mortgage insurers greeted the wolf on their doorstep but avoided bankruptcy. Fannie and Freddie needed multibillion dollar infusions of capital to stay afloat. They had insured the bottom 80% of home mortgages for a couple of basis points premium. Chicken feed!
The housing cycle should be good for the next 5 years unless prime mortgage rates press up to a 6% rate. Not my call. I see 5% mortgage rates when 30-year Treasuries yield 4.25%. Historically, a prime home mortgage at 5% is a Consumer Reports best buy. It doesn't destroy the eligibility universe of borrowers.
My reading is the market stands efficiently priced at 1,650 assuming 30-year Treasuries hit 4.25%. What everyone forgets is that when the bond market resets it's telescoped in time, a couple of months. I can't prove that institutional investors reallocate 10% of their portfolios from bonds to equities, but it could happen.
When I scroll down 13F filings of high intensity players, excluding Buffett, their names don't cover big cap properties in the S&P 500 Index. Carl Icahn’s $1.5 billion Apple buy is the exception, a pure gut play. He can't model the company's numbers much differently than the rest of us. Pressing for another massive stock shrink is a chancy gambit. Owning less than 1% of Apple’s market capitalization doesn't get you a seat at the boardroom table.
My POV on Apple is agnostic, but from $400 to $500, I missed out on one fast ride. I'm concerned that high end smartphone penetration rates in China remain dormant. Meanwhile, phone subsidies of $200 to $300 from cellular carriers like Verizon and AT&T won’t last more than a year or two.
Turning to Buffett’s 13F filing, I’m troubled justifying almost $30 billion invested in Coca-Cola and IBM, but $19 billion in Wells Fargo remains a polite play on the home mortgage sector. The remainder of Berkshire’s portfolio is OK but unexciting possibly with the exception of DirecTV and Liberty Media.
Buffett no longer is judged on portfolio performance but on repositioning his company in major deal sectors like railroads. My read on the second quarter’s results finds Burlington Northern's earnings growth rate inferior to independent roads like Union Pacific.
The picture changes markedly when I turn to Icahn Associates’ top 10 portfolio positions. No household names, but rather Carl’s massive tentacles (testicles) encircling underperforming properties like Dell, Forest Laboratories, Chesapeake Energy and Federal-Mogul. The $766 million play in Herbalife is a lady or the tiger situation best watched from the sidelines.
At Paulson & Co. the average investor wouldn’t recognize most of the names, excepting Belo, Elan, Vodafone, Cooper Tire & Rubber, Hess and Aetna. There is no industry theme herein. Many of these properties are underresearched by Wall Street houses.
Paulson has singled out what he thinks are inefficiently priced properties. There's a lot of homework involved monitoring this list. The anti-theme is the top 100 names in the S&P 500 Index are for amateur investors. Big investments in gold properties and copper gnawed at his vitals.
Greenlight Capital's portfolio sports more recognizable names. Apple, General Motors, Aetna and Cigna, for example. Marvell Technology is a serious holding but looks efficiently priced.
The adds interest me, namely, Liberty Global, John Malone’s property. Malone’s busy rolling up cable franchises in Europe. I'm sure he sees what we all see: The concept is own cable properties – not for TV delivery, but as prospective broadband monopolies where all the future growth resides.
Pershing Square’s top portfolio positions pop out more recognizable and controversial, but some go-for-control positions like JCPenney didn’t jell. I’m skeptical about Burger King's moxie to go head-to-head with McDonald's. Procter & Gamble leaves me cold, but Pershing's biggest holding, Canadian Pacific Railway, is a home run and still most growable under new management. I arrived late on this one.
Add Soros Fund Management as a big player in JCPenney and Herbalife, but Google is its largest position. Liberty Global pops up here too. The screaming theme or anti-theme underscoring all these operators is most big cap properties stand too efficiently priced today.
You gotta embrace controversy, chancy room for improvement stories or advocate changes in management, sloughing off dull divisions and even going into debt, as Apple can do, to shrink market capitalization markedly.
Thirty odd years ago Carl Icahn was rightly labeled a greenmailer. We called him iron pants because he easily withstood 8-hour depositions huddled with the target’s lawyers. Today it's no longer buy me out and I'll go away. Shareholder advocacy is the polite phrasing that everyone nods his head at. During the eighties some 20% of the market’s levitation would be put at the feet of LBO action. Shareholder advocacy currently doesn't do it for me.
Passive players need not despair. Yes, 30-year Treasury interest rates swoosh towards 4% and maybe overshoot. But, the federal deficit just shrunk down to a respectable 4.3%, not 10%. Tax receipts from Wall Street's honchos do pile up.
And yet, the value of the S&P 500 Index weeks ago reached 100% of GDP, historically a fully priced indicator. Maybe, this time is different. Labor’s GDP share sits at rock-bottom, still nickel and dimed. Inflation nowhere is sightable.
I don't see geezers shouldering sandwich boards proclaiming "the end is near". But outside my window at 101 Park Avenue, a guy with a stentorian basso profondo is ranting and raving about an unethical American Airlines. Somebody down in D.C. must’ve heard him. Find him standing on the terrace at 101, promptly at 9:30 a.m., weekdays.
I am sticking fully invested. My basso profondo is a lagging indicator. I'll bet he doesn't even know AMR is a basket case.
Sosnoff owns personally and / or Atalanta Sosnoff Capital, LLC owns for clients the following investments cited in this commentary: Wells Fargo, General Motors, Chevron, Philip Morris International, Google, Johnson & Johnson, JPMorgan Chase, Bank of America, Citigroup, Walt Disney, Home Depot, United Technology, Gilead Sciences, Goldman Sachs, Radian Group, MGIC, Union Pacific, Chesapeake Energy, Liberty Global and Canadian Pacific Railway.
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